Cyber Crime
Synthetic ID Fraud: The Fake Identities Creating Real Challenges
Fraud continues to evolve, with fraudsters constantly developing new strategies to outwit security systems. One of the latest threats is synthetic identity fraud, which involves creating fake identities using a combination of real and fabricated information. These aren’t just typical fake IDs; they’re carefully constructed, making it difficult for banks and businesses to detect them until significant damage is done. This type of fraud is becoming a growing concern, particularly in regions like the U.S., Europe, and parts of Asia, where rapid digitalization is opening doors for both innovation and exploitation.
According to data from McKinsey, synthetic identity fraud accounts for 10-15% of global financial losses. In 2023 alone, such frauds caused approximately $44 billion in losses worldwide, and the problem is far from slowing down.
Why Traditional KYC Methods Fall Short
The challenge with synthetic identities is that they can easily bypass traditional KYC (Know Your Customer) checks. Because part of the identity is real, basic verifications, such as matching a name to a Social Security number or reviewing a credit report, often don’t reveal any red flags.
To combat this, businesses need to adopt more creative verification methods. Here are several innovative approaches that can help detect these fabricated identities:
1. Verifying Geolocation: Identifying Where They Truly Are
Geolocation can be a critical tool for spotting fraud. If a fraudster claims to be in Los Angeles but their device’s IP address shows they’re actually in a completely different part of the world, it’s a clear sign something is amiss.
- How It Works: By analyzing IP addresses and geolocation data, companies can verify if the customer’s claimed location aligns with their actual one. Discrepancies can signal fraudulent behavior, especially for those operating internationally while pretending to be based in the U.S., UK, or EU.
- Tools: MaxMind and IPQualityScore provide real-time geolocation data to flag suspicious activity.
Tip: If the billing address is in New York but the IP address shows a location in Nigeria or Eastern Europe, it’s worth investigating further.
2. IP Risk: The Digital Footprint That Speaks Volumes
Not all IP addresses are equal—some come with a higher risk due to associations with known fraud hotspots. Fraudulent IP addresses often show patterns like multiple accounts using the same IP or frequent shifts in location.
- How It Works: IP risk scoring tools evaluate an IP address’s history and reputation. If the IP has been linked to previous fraudulent activities, it’s flagged as high risk.
- Tools: Platforms like Fraud.net and GeoComply assess IP risk and help businesses filter out suspicious activity.
- Tip: Combining IP risk scoring with other verification techniques can reduce synthetic fraud attempts by up to 20%.
3. Email Risk: Not Every Email Is What It Seems
Email addresses used by fraudsters are often newly created or linked to free, low-reputation services. Email risk scoring tools can assess the reliability of an email based on factors like its age, domain, and past activity.
- How It Works: These tools analyze details such as whether the email is linked to a trusted domain and its history of use. If the email is brand new or associated with suspicious activity, it raises a red flag.
- Tools: LexisNexis’s Emailage provides email risk assessments to help detect fraudulent addresses.
- Tip: If an email is just a week old and the person is requesting a substantial credit line, further scrutiny is warranted.
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4. Device ID Checks: Fraudsters Can’t Hide Their Devices
Every device has a unique digital fingerprint, making device ID checks a powerful tool in fighting fraud. Even if fraudsters change their identity, they can’t easily alter their device’s unique ID.
- How It Works: Device ID technology tracks key characteristics of a user’s device, like operating system and browser settings. If the same device is used in multiple fraudulent activities, it’s flagged for further inspection.
- Tools: Leading platforms like ThreatMetrix and Kount excel in tracking device IDs.
- Tip: LexisNexis found that device ID checks can reduce synthetic identity fraud by up to 25% when used alongside other methods.
5. Cross-Referencing Databases: Multiple Sources for Verification
One of the most effective ways to spot synthetic identities is by comparing customer information across different databases. By checking details like credit reports, phone records, and government databases, businesses can verify the consistency of customer information.
- How It Works: Cross-referencing ensures that identity details like name, address, and identification number match across multiple sources. If there are inconsistencies, it could be a sign of fraud.
- Tools: Platforms like Feedzai and ShufiPro specialize in tapping into various data sources for cross-referencing.
- Tip: Look for unusual patterns, like a high number of phone numbers linked to one identity or addresses that don’t appear in standard databases.
Fighting Synthetic Fraud on All Fronts
Preventing synthetic identity fraud requires a multi-layered approach. By combining various verification methods, businesses can build a more comprehensive view of who they’re dealing with. Geolocation helps confirm a user’s true location, IP risk scoring identifies potentially fraudulent activity, email risk assesses suspicious addresses, device ID checks expose repeat offenders, and cross-referencing databases ensures consistency across all information.
While synthetic identity fraud is a serious and growing threat, the good news is that businesses have the tools to fight back. By moving beyond traditional KYC processes and adopting advanced verification methods, they can stay ahead of fraudsters and better protect themselves from the rising tide of synthetic identity scams.